The UK has lost its edge as a target for foreign direct investment (FDI), according to a new report from consultants Ernst & Young.

New UK FDI deals

1H 2001 - 197

2000 - 575

1998 - 641

The flop of internet-driven businesses and a sharp downturn in the telecoms and software sectors has led to a decline in foreign investment projects throughout Europe.

But the UK has lost market share to other European competitors as well as seeing overall FDI fall away.

And, in a stark warning to British business, the report warned that many existing investors are currently reviewing operations and are likely to be considering relocation away from the UK.

Harmful legislation?

Ernst & Young said there was a perception amongst its clients that legislation in the UK was going in the "wrong direction".

Britain's stance on the euro is the most controversial issue for businesses operating out of the UK.

Share of total European FDI

UK 21%

France 12%

Spain 11%

Czech Rep 5%

Sweden 5%

And pro-euro groups have been quick to blame the decline in foreign investment coming into the UK on Britain's reluctance to embrace the single currency.

"Foreign firms have made it clear that if we reject the euro, then they would reject Britain and move elsewhere in Europe," said Simon Buckby, campaign director for Britain in Europe.

But Business for Sterling points out that foreign investment has also declined in some eurozone countries such as France and Germany.

Ernst & Young consultant Mark Hughes maintains that the euro is only one factor amongst many others, including the adoption of EU labour laws and the fact that the UK's cost base is not as competitive as it once was.

Mr Hughes also warned against pundits who brush off Britain's dwindling popularity as part of the collapse of the dot.com sector and the US slowdown.

UK's 'right place in the world'

In the first six months of the year, just 197 projects came to Britain, compared with 575 projects during 2000.

[The UK] is no longer necessarily the natural choice for foreign investors

Mark HughesErnst & Young

"Over the last two years, the UK's market share has shown a slight but persistent decline," said Mr Hughes.

In 1998, the UK attracted 28% of inward investment across Europe, with 641 projects. This has now shrunk to 21%.

"The UK may now be entering an era where it is finding its right place in the world... the country is no longer necessarily the natural choice for foreign investors," said Mr Hughes.

And while the UK saw its popularity ebb away, Spain, Sweden and the Czech Republic all boosted their market shares.

Challenges ahead

Ernst & Young said UK development agencies must now wake up to the challenges, and recognise that they could no longer rely on "age-old marketing certainties".

It also called on company managers to upgrade their activities continually so that relocation becomes unthinkable.

And the report issued a stark warning that many companies will be reviewing their operation across Europe.

"Getting to grips with shortcomings in physical infrastructure is more important than ever," Mr Hughes added.